* Oil firms ask for more standardisation
* Sector's shift favours bigger, integrated service firms
* Oil firms may delegate more competence
By Balazs Koranyi and Gwladys Fouche
OSLO, March 26 On a mission to crush costs,
global oil firms are rewriting the rule book on how they deal
with service companies.
Energy companies have sharply cut spending plans after a
decade of double-digit growth, saving cash for dividends as
stagnating oil prices and cost increase on mega projects
worldwide have squeezed margins and angered shareholders.
Some now ask service firms to come into projects at the
start, ditch some tailor-made designs in favour of standardised
solutions and stay with projects longer to reduce the number of
contractors involved, moves that reduce costs but favour bigger,
Oil service shares have suffered over the past year, with
European firms hit the most. Analysts at UBS estimate they trade
at 14 percent discount to their 5-year average with a further
downside risk as investors adjust to a lower growth scenario.
"It is evident that the problem is not the services making
supernormal returns but rather, given the persistence of
execution issues, that something in the contracting model needs
to change," UBS said.
"Now is the time of integration, with one service company
doing everything with the client from planning the well to
building it," Torjer Halle, the chairman of Schlumberger's
Norwegian unit said. "Size matters and (integration)
will happen in the industry."
A big extra cost has been that oil companies have built up
redundant competencies with costly control systems since BP's
2010 Macondo accident in the Gulf of Mexico, especially
for expensive engineering.
"Over many years people have become very inward thinking and
believe the processes they have built up are the Holy Grail,"
said Ashley Heppenstall, the CEO of Swedish oil firm Lundin
Rising oil prices had also masked the sector's eroding
competitiveness and energy firms grudgingly swallowed cost
blowouts or delays without revising their contracting models.
"We have seen what .... we refer to as 'gold-plating',
specifications beyond what is really required," Kristian Siem,
the chairman of Britain-based Subsea 7 said.
"There is a lot of 'it is nice to have' but not 'need to
have'. If you eliminate that, that is where the big cost is."
THE SVERDRUP WAY
Norway's Statoil, last year's most successful
offshore explorer, has already taken a leap in cutting costs.
It told Aker Solutions to reduce engineering costs
by up to 30 percent, potentially $900 million, in the initial
phase of its Johan Sverdrup oilfield, a North Sea giant with up
to 2.9 billion barrels of oil.
To get that kind of saving, Aker Solutions has to get
involved earlier than in past projects, combine work with
another field and reuse design elements from past projects -
instead of starting from scratch, Chief Financial Officer Leif
Statoil has already experimented with some standardisation
on smaller, marginal fields but has not done anything on the
scale of Sverdrup, which could cost $20 billion in its initial
"Tailor-made projects needs to be replaced by copy-paste
because there's substantial opportunity to just repeat
solutions, not necessarily go into mass production, but to
replicate solutions that have been used before to reduce costs,"
Jan Arve Haugan, the CEO of Norway's Kvaerner said.
The new business model means energy firms will work with
fewer suppliers, reducing the number of costly and time
consuming tenders, and awarding bigger contracts.
They could also reduce overlapping engineering competencies
and delegate more responsibility to service firms.
Just this week Schlumberger, one of the biggest players in
the sector, said it was taking business away from rivals and
that its first quarter was better than it projected.
"Shifting supplier for every project, you will never get
efficient processes," Aker's Borge said. "This gives us a
stronger position but it also puts your head on the block....
because there's a risk that you invest in a relationship but
can't secure the business."
Another risk is that the increased use of standardisation
could push firms to develop simpler, less complex fields and
leave more complex finds dormant.
"If we are not able to lower the cost development, decision
makers will move away from the North Sea once the ongoing
projects are done," Kvaerner's Haugan said.
The International Energy Agency sees oil prices
down at $102 per barrel next year from the current $107 as
several producers ramp up output, a big change for energy
companies that have commissioned projects assuming higher
(Additional reporting by Joachim Dagenborg, editing by William